Iron ore pricing system near collapse as talks go on

Rio Tinto Group, the world's second biggest iron-ore producer, said some contracts may revert to spot market pricing tomorrow as China's steelmakers argue for a deeper cut than Asian rivals agreed.

Talks with Chinese steelmakers are continuing, Gervase Greene, a Perth-based spokesman for Rio said by phone. Nippon Steel, JFE Holdings and Posco, Asia's three biggest steelmakers, agreed last month to a 33 per cent cut in the annual contract price for benchmark iron ore.

For about 40 years, iron-ore suppliers have held annual talks with steelmakers to fix prices for the next 12 months. The 2008 round splintered, and this year China's steel association says Rio's price agreement isn't a benchmark. This year would be the first in at least a decade that Rio hadn't agreed prices with most customers by June 30, when some contracts can revert to prices for immediate delivery, known as the spot market.

''Rio Tinto has long been a supporter of the benchmark system but if customers choose to buy on the spot market instead they will,'' Rio's Greene said by phone.

Abandoning annual pricing agreements may increase earnings volatility for London-based Rio, JPMorgan Chase & Co. said last month. Rio said June 1 that about half the ore it produced this year has been sold at spot prices.

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China overtook Japan as the single biggest buyer of iron ore in 2003. Until then, benchmark prices had usually been set by Japanese or European steelmakers. China was the first nation to settle for the 2007 Japanese financial year, agreeing a 9.5 per cent increase in prices with Vale, the world's biggest iron ore exporter.

Spot prices for iron ore into China gained 20 per cent since Rio settled prices with Japanese steel mills on May 26, the first settlement of the year. Spot prices in China are currently similar to the annual contract price for the year to March 31 accepted by steel mills in Japan, Korea and Taiwan.

China has rejected the annual price accord and called for contract prices to drop as much as 45 per cent.

''We have a number of contracts that when they get to June 30 there is the potentiality for those agreements falling away and then moving to spot,'' Sam Walsh, chief executive officer of the London-based company's iron ore unit, said on May 26. ''I don't think that would be a good thing for either iron ore producers or steel producers but that's the reality.''

Vale is waiting for Australian iron-ore producers to settle contract prices with China before concluding its own agreements, Chief Executive Officer Roger Agnelli said last week. It has agreed to cut prices by 28 per cent for ArcelorMittal.

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BHP Billiton, the world's third largest iron ore producer, doesn't make any announcements about the pricing of its long term contracts until the majority of its contracts are settled, BHP spokeswoman Samantha Evans said by phone from Melbourne.